Unsafe deposit

The asphalt road to Pradip Chakraborty's home in Dakshin Barasat, a largely rural settlement in West Bengal's 24 Parganas South district, 40 km from Kolkata, is narrow and shimmers in the April heat. Inside the house - an old fashioned, whitewashed, two-storey structure with pictures of the mystic Sri Ramakrishna Paramahansa and his wife Sarada Devi adorning the entrance - Chakraborty is on the phone, inviting people in his neighbourhood over. Many arrive in anxious haste.

Chakraborty, 56, was the most successful agent in Dakshin Barasat of the now busted Saradha Group. He was one of three agents ranked 15th by the company, the highest in its hierarchy of agents, entitling him to plump commissions.

Over the past three years, the former Khaitan India and Eureka Forbes salesman had enrolled 500 agents for Saradha's so-called chit fund scheme, each of whom enrolled at least 50 investors. This made Chakraborty's unit a large chain of 2,500 investors with deposits of Rs 10 crore. "Sudipta Sen cheated us," says Chakraborty, sitting cross-legged on his bed. He is alluding to the Saradha Group's Chairman and Managing Director, who was arrested on April 23. "We got carried away by the name of Sarada Devi (adapted by the fraudster with an 'h') and Sen's connections with the ruling Trinamool Congress and Chief Minister Mamata Banerjee. For many of us, death seems to be the only way out."

MANY SARADHASThe Saradha scam has duped 1.4 million investors of Rs 4,000 crore, but this could well be the tip of the iceberg. Driven by the lack of legitimate savings schemes for the rural poor, inadequate regulations and political patronage, hundreds of illegal Ponzi schemes masquerading as collective investment schemes or chit funds have sprung up across India.

On March 14, Corporate Affairs Minister Sachin Pilot presented a list of 87 such companies in Parliament, against whom complaints had been received for indulging in Ponzi schemes. Seventy-three of these were from West Bengal. Eight companies of the Saradha Group figure in the list, as do 16 companies owned by Rose Valley, a sponsor of the IPL team Kolkata Knight Riders. Also on the list are the MPS Group (four companies), Vibgyor Group (two companies), Prayag Group (four companies), and the Rahul Group, among others. The ministry has ordered the Serious Fraud Investigation Office to fast-track investigations into the working of these organisations.

Many of these companies are engaged in a dangerous "money chain" where one investor's principal and interest is paid off with money from new investors. Such schemes collapse when no new investors come in, or when suspicious investors demand their money back in one go. Like the Saradha Group, these companies take money from investors in the name of tour packages, investments in agriculture, or purchase of plots or homes in prime locations over a specified period of time, with a money-back option added at the end of the maturity period. Investors are encouraged to cancel their bookings and re-invest the money in new projects, since, in most cases, there are hardly any projects on the ground, or they fall way below the value of the investment garnered. The money thus raised goes into the pockets of the promoters of such schemes.

In April, Securities and Exchange Board of India (SEBI) Chairman U.K. Sinha said at a seminar in Mumbai more than Rs 10,000 crore had been raised by so-called money circulation schemes, or by people who run collective investment schemes but refuse to be under any sort of regulation. "People who invest in such products are simple, ordinary workers," says Sinha. "They are not putting in illegal money. They are putting their hardearned money into this. But the process through which it is channelised is, unfortunately, taking that money out of the legal framework." SEBI is probing several such companies.

The money raised by these firms could be higher than SEBI's estimate, given that Sen alone is said to have duped investors of Rs 4,000 crore.

Rose Valley Real Estate & Constructions, for instance, had raised Rs 1,272 crore as of March 31, 2010. Sitting in his office in Kolkata's Park Street, MPS Group Chairman P.N. Manna says in the last 13 years, his company, MPS Greenery Developers, collected Rs 1,765 crore from 1.8 million investors in West Bengal and neighbouring states such as Assam and Orissa, through a scheme that "fulfils all parameters". But he admits he is yet to get a registration certification from SEBI.

GROWING PRESENCEAccording to the Corporate Affairs Ministry, there were 4,156 chit funds registered in India as of 2008, governed by the Chit Funds Act, 1961 (Madras Act) and the amended 1982 (Central) Act. However, unregistered chit funds would be several times the number. According to a January 2007 study by the Institute for Financial Management and Research, "the unorganised chit fund market is huge and growing". For instance, it noted that 6,000 of Hyderabad's total of 7,300 chit funds were unregistered.

Chit funds help small traders and businessmen save excess cash on a daily or monthly basis, and have become a major savings option in India. Interest rates are around 12 per cent a year - which is low, considering money lenders, on whom many rural Indians rely, charge as much as 72 per cent. Interest on bank fixed deposits is around seven to nine per cent.

However, the Saradha Group was not running a chit fund. It has denied SEBI's allegations that it was running an investment trust and offering returns of up to 24 per cent. It said in a representation to SEBI in 2011 that it was purely in the real estate business and that it got money from individuals to buy immovable property. In fact, it was taking deposits from investors as advances for exotic holidays or land parcels, and offering them the option to cancel the booking and get their money back with 12 to 14 per cent interest. Lured by higher returns and coaxed by agents, most investors cancelled bookings.

Many companies that run such schemes have hardly a fraction of the assets they originally promise. For example, Maharashtra-based Maitreya Services, which runs a collective investment scheme, had raised Rs 1,332 crore from the public as "advances" as of March 31, 2011. It has repaid only Rs 538 crore so far, prompting SEBI to ban the company and its directors Varsha Satpalkar and Janardan Parulekar from the securities market until the illegal schemes are terminated.

MPS's Manna says his group has assets of Rs 4,000 crore, but surprisingly, there are no investors who claimed the assets they were eligible for in the last 13 years, although MPS has been running schemes with a 10-year maturity period.

Those out to cheat the public are extremely innovative. "People are coming out with such ridiculous schemes, like emu and goat farming," says SEBI's Sinha. "SEBI has taken note of it. We must have started prosecution and taken action against a dozen such companies.

We have been writing to state governments and fighting court cases." SEBI is fighting 11 lawsuits with MPS alone in lower courts. In March, SEBI imposed a Rs 1 crore fine on Rose Valley Real Estate for not providing the details it sought in a case of an allegedly illegal debenture issue. Last year, M.S. Guru of Perundurai in Tamil Nadu was arrested after he duped 20,000 investors of about Rs 500 crore, by luring them to invest Rs 1.5 lakh in emu farms, promising a return of Rs 3.34 lakh in two years by rearing the Australian-origin birds.

In 2009, Kerala police busted a money chain run by one Sabarinath, who, along with his associates in a company 'Total 4 U', lured as many as a few thousand people to invest Rs 200 crore by promising high returns. Last year, authorities auctioned nine luxury cars belonging to Sabarinath, including a BMW and a Toyota Lexus, to pay back some of the investors.

LACK OF OPTIONSTwo major reasons for the growth of chit funds, legitimate or otherwise, and other dubious collective investment schemes are the lack of safe savings schemes in rural areas, and a poor regulatory framework to check fraudulent companies.

According to CPI(M) leader and former West Bengal housing minister Gautam Deb, small savings and post office collections in West Bengal from April to October 2012 were only Rs 194 crore, against the target of Rs 8,370 crore. "The state's small savings rate has fallen due to the thriving chit fund industry. But the chief minister is never heard speaking against chit fund companies," he said in December 2012.

For the country as a whole, total deposits under small savings in the Public Provident Fund (PPF), National Savings Certificates (NSCs) and post office schemes, have fallen from Rs 1.65 lakh crore in November 2010 to Rs 1.22 lakh crore in November 2011. This is because many small investors moved into investing in chit funds and banks that offer higher interest, and also in gold and real estate.

In September last year, Sachin Pilot, who was then Minister of State for Communications, acknowledged that post office deposits declined in 2011/12, but said the government had taken measures to stem the fall.

These included raising the rate of interest on post office savings accounts from 3.5 to four per cent, reducing the maturity period for monthly income schemes and NSCs from six to five years, and raising the annual ceiling on investment in the PPF scheme from Rs 70,000 to Rs 1 lakh.

GAPS IN THE LAWAnother major reason for the proliferation of chit funds and fraudulent collective investment schemes is the absence of adequate regulations and, in some cases, the lack of clarity in laws. Chit funds are monitored by state governments, collective investment schemes by SEBI, and nonbanking finance companies (NBFCs) by the Reserve Bank of India (RBI).

SEBI has been fighting several court cases with the promoters of questionable schemes. For instance, the MPS Group had sought SEBI's nod for a collective investment scheme in March 2000. It was denied, after which MPS began a court battle with the regulator. "We've exchanged 100 to 200 letters with SEBI," says MPS Group's Manna. "Then they asked me to get a 'comfort letter' from any nationalised bank. But no bank is authorised to give such a letter. The Calcutta High Court has said we can continue the scheme if we have the requisite approval."

Without waiting for SEBI's nod, Manna is back in the business after a brief hiatus, and says he has provisional registration from SEBI. But SEBI says an existing collective investment scheme cannot launch any new scheme or raise money from investors even under the existing scheme, unless SEBI grants it a certificate of registration.

In the case of Rose Valley, SEBI asked the company on January 3, 2011, to stop collecting money. But the Calcutta High Court restrained SEBI through an interim order. "SEBI is trying to punch above its weight," says Sandeep Parekh, founder of Finsec Law Advisors and a former SEBI executive director. "There is a case for better co-ordination among various regulators."

SEBI, which is also fighting a fierce battle with Subrata Roy's Sahara Group over allegedly illegal means used to collect Rs 24,000 crore of depositors' money, has a staff of only 500, of which just 16 employees are in its Kolkata office, making enforcement of regulations difficult. "It's time for the RBI to step in," says Parekh. "Any deposit-taking has to be only with its approval."

While the RBI has acknowledged the menace of companies operating collective investment schemes in the name of chit funds, Governor D. Subbarao has said the onus of regulating them was with state governments.

Although every NBFC has to be registered with the RBI, some categories of NBFCs, such as chit funds and stock broking firms, which are regulated by authorities such as state governments or SEBI, are exempted, to avoid dual regulation.

The Chit Funds Act, 1982, says no scheme can begin without obtaining approval from the state government within whose jurisdiction it is to be conducted, and unless the fund is registered in that state.

SEBI, on its part, has reportedly written to the union finance ministry to appoint a regulator to look into the operations of deposit-taking companies.

On April 30, the Mamata Banerjee government passed the West Bengal Protection of Interest of Depositors in Financial Establishments Bill, 2013, by convening the assembly's first emergency session in 50 years. The new Bill replaced the earlier West Bengal Protection of Depositors Interest Bill, 2009, introduced by the former Left Front government, which was sent to the President but did not get his assent.

However, if the government wants to help investors affected by the Saradha scam, it needs to implement the Bill retroactively. State Parliamentary Affairs Minister Partha Chatterjee has said the Bill would also enable the government to punish fraudulent individuals and confiscate their properties.

POLITICAL SUPPORTThe West Bengal government will have a lot to explain for the direct links of some of its functionaries with dubious chit fund companies. While its Members of Parliament Kunal Ghosh, a former CEO of Saradha's media unit, and Srinjoy Bose, are facing the heat after being named in Sen's letter to the CBI, investors say the party's patronage was clear from the start. Displaying a file agents used to lure investors, Chakraborty points to a photograph of Chief Minister Banerjee flagging off a Saradha Group's ambulance service, and another brochure with Ghosh's picture.

"How would we not believe that Banerjee was endorsing the activities of Saradha after seeing all these?" he asks. He also holds up a placard with state Transport Minister Madan Mitra's name on it, saying he took it away from Saradha's office. "How can Mitra claim he is not associated with Saradha? I have proof."

Sen's political clout was complemented by his media business. He launched several publications and owned TV channels that ran his companies' advertisements. All these businesses have now shut shop.

By the time our team finished the interviews in Barasat, at least 25 people had assembled at Chakraborty's home, all of them tense and unsure of their future. "I had put all my life's savings into this, and now everything's vanished," says a weeping Dipali Pal, 38, who deposited about Rs 2 lakh of her provident fund money after she quit her job at Eastern Silk Industries. Mitali Chakraborty, Pradip's wife, said she joined in the name of her son, as it was expected to bring her good luck. But luck seems to have evaded these hapless villagers, at least for now. They have to find solace in the beatific smile of Sarada Maa, who looks out at them from the picture on the wall.